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The rand is most vulnerable to the rise in US Treasury rates
among its emerging-market peers, according to Morgan Stanley, which predicts
further weakness for the battered currency as the country’s finances
deteriorate.

The rand may decline about 6% to 15.50 per dollar in the
run-up to the medium-term budget statement on October 24, Morgan Stanley
strategists including Min Dai wrote in a report. Investors will watch the
budget update for signs of fiscal slippage as sluggish economic growth curbs
tax revenue.

“We remain convinced that South Africa will underperform
into the medium-term budget update,” the strategists said. With foreign
investors holding about 40% of the government’s rand-denominated bonds, “we
believe that South Africa is the most vulnerable country in the current
environment,” they wrote.

The rand slumped 2% on Wednesday as 10-year US Treasury
yields climbed to the highest level since 2011, attracting money to the dollar
and damping appetite for riskier assets.

The currency extended its decline on Thursday, weakening
0.5% to 14.7190 per dollar by 14:37 in Johannesburg. The probability of the
rand hitting 15.50 by October 24 is 25%, according to Bloomberg’s forecast
model.

Foreign investors have sold a net R55.7bn of South African
bonds this year, according to JSE data, with the sell-off gathering momentum
since the beginning of the second quarter.